Onyia: How to resolve lingering gas to power crises

How To Resolve Lingering Gas To Power Crises
Prof. Chidi Onyia leads the Power Sector Team at the UK Department for International Development (DFID) funded Nigeria Infrastructure Advisory Facility (NIAF), which is designed to tackle bottlenecks in infrastructure development to spur non-oil growth. Onyia previously served as Chairman/CEO of TOL Consult, USA and OrgLearning Nigeria. In this interview with EMEKA ANUFORO in Abuja, he spoke on Nigeria’s lingering issue of gas to power and how creative alternatives could be adopted to resolve the issue.

What do you think of the never-ending gas to power challenge of the power sector?
The transitional electricity market (TEM) was supposed to be a phase, where the market becomes a take-and-pay process, and people have to be liable to the agreements they signed. However, the agreements are not in place and now the gas suppliers are on best endeavour basis, meaning if they have, they will give and if you can pay, you do so.

Because most of the gas coming into the sector is associated, the International Oil Companies (IOCs) need their money, but the main money comes from crude oil, though there are certain loopholes within the market that allows for such unbusiness-like behaviour and we think the current issue can only be resolved, when the market becomes disciplined. This entails the Bureau of Public Enterprises (BPE) and other entities serving on the board of the electricity companies holding their fellow board members responsible for what they need to do, where the regulator acts by holding the players accountable and where government is involved in the sector’s risks.

We are saying if there is risk involved in taking gas to produce power, but because of vandalism that is not happening, the consumer should not be exposed to that risk. If there are problems based on the Discos not reducing their ATC&C losses and then causing a market shortfall, they should be held liable for that, same as gas suppliers for the agreements they signed.

The regulator holds all these together and we are very confident that the new sets of NERC commissioners will review all of them and adopt a new approach to regulatory practice that is evidence-based, rather than what it had been in the past. We are hoping that the government will go back and look at market processes in the sector.

The sector seems to have a lot of blame shifting, from the regulator to operators. What does this mean for the market?
Personally, I think the market and the regulatory practice hasve to be evidence-based. It cannot be based on second-guessing and secondary and third level data from the Discos to the Regulator, who should have a robust data management process that actually gives it real information. The CBN is a regulator and does not depend on data from banks to run its checks, as the data crosschecks what the banks submit, so they can flag anomalies.

I think the Regulator has to invest in creating a data management framework that will help them achieve clear customer enumerations, so we know who the real customers are and what they actually should be paying, so that we can align the metering plan. As long as we don’t have clear data processes, we are going to have people passing the blame from end-to-end.

As long as the liquidity issue is not resolved, the market will continue to struggle and that could create investor apathy, which is not what we envisaged for the sector. We expected that the market would create opportunities for capacity investments.

There is a new thinking on renewables. Have you made proposals on this to government?
Yes, we have a team on that and we have said that government has to diversify our energy mix. For now, the thermal approach is good, because we have the fuel source readily available. However, we must also take a growth model, which is what the government is saying it will adopt. The cost of renewable energy components is dropping and NBET just signed 14 PPAs, but we know that as the technology improves and security variables are addressed, the cost of renewables would continue to decrease. It is now left for the Regulator to determine if the tariff is acceptable. We strongly believe that renewables is a good way to go. If we had up to 25 per cent of our energy from renewables, we would not be plagued with system collapses, due to vandalism and resultant fuel constraints in the Niger Delta.

Our team is also working with TCN to adapt to a system that allows for the transmission of solar energy into the grid. There has to be strategic thinking down the line and we are working with government to amend the grid code and other relevant documents.

Specifically, how has NIAF intervened in Nigeria’s power sector recently?
This is the second phase of NIAF. There was NIAF-1, which was a five-year programme, while NIAF-2 ends in December of this year. What NIAF has done within the power sector is help with the contractual framework and thinking around how the reform can be implemented, as well as, helps to strengthen institutions within the power sector, but more importantly, create a credible path towards the realisation of the power sector reform roadmap.

This has not been easy, because it is a new project and nobody has gone through this sort of reform process in Africa, so there is a learning curve. What we have done is to be agile in our ability to support our clients. Our responsiveness towards this whole process has been quite commendable, especially thinking about what has been during the transitional electricity market phase.

We have also worked with the Regulator on the Multi Year Tariff Order (MYTO) model and to strengthen the capacity of the Regulator, so that they can conduct minor and major tariff reviews. NIAF has also supported the Transmission Company of Nigeria towards optimisation and to identify critical projects, by bringing a team of experts to work hand-in-hand with TCN, which remains the only entity that is still in government hands, to be able to deliver on projects that will add significant wheeling capacity to Nigeria’s grid. This was not always the case. In the past, projects were identified and developed without looking at the integrative nature of what they are supposed to achieve.

We also worked with the National Integrated Power Projects (NIPP), assisting through the transaction aspects and process bottlenecks to ensure that transaction closure occurs under more creative ways.

Another key area NIAF has worked in is in the gas-to-power space. The projections made on electricity growth were based on government’s thinking or assumptions that were not founded on real projects on the ground. You will notice that most of the developments in the petroleum space are around associated gas, which means that the IOCs will have to be able to invest more in oil, so that associated gas can go to power.

However, with the plan to increase generation significantly, there has to be a creative way to address the growth in the gas sector, specifically gas-to-power outside associated gas.

What we have done here is to suggest to the government alternative gas intervention strategies, which will include exploring inland basins and non-associated gas fields, as well as, bringing the Central Bank to be able to cede some money towards focused gas investments for power. These are some areas we have worked on to ensure that the policy makers begin to think differently from the way they have done in the past.

To what extent has government accepted these suggestions, have you made these proposals already?
It is actually a proposal we have made and is being looked into seriously at the highest levels of government, which is leading to the establishment of committees to address how this current licensing regime of the Federal Ministry of Petroleum can be flexible enough to accommodate gas investments.

We have also reviewed how to ensure the IOCs meet their domestic gas obligations, which have not been the case over the years and to determine government’s obligation in the joint venture arrangements, where government may not have kept its own part of the obligation and prevented these investments from taking place.

Now, serious discussion is taking place at the highest level and across the power and petroleum sectors, which was not the case before. The two agencies had different thinking around how to resolve the gas issue and there was no clear collaboration, but collaborations based on our recommendations are taking place now from the Office of the Vice President.

The issue of gas pricing has remained quite a challenge. Have you discussed this with the stakeholders?
Yes, the issue of pricing has always been keen in the domestic gas space, and that led to the domestic gas supply obligation agreement with the IOCs. This has not been kept by the IOCs and as a result, we do not have that volume of gas coming into the domestic space and by extension the power sector.

That is changing now, because there is serious mitigation around that, which by the way expired in December 2015, and so, they are now working on ways to tighten the loose ends, where parties failed in their obligations.

Another thing is that government has worked diligently across the sector to come up with a new gas price that gives gas pricing a slight competitive outlook than what it was before. Now, it is all about business and profit within a reasonable margin and the new gas investors are able to find IPPs that they can sign supply agreements with them, which means that the Regulator will have to sign tariffs for IPPs like Azura, which is coming on stream.

As much as the domestic gas pricing is not as high as you will find in the $4 export price, the difference is not significant or so much, and if the obligations are kept by the partners, I am sure we will be able to find enough gas to meet our needs.

How do we balance charging for gas in dollars and a fluctuating forex regime?
This is one of the radical changes in pricing from macro-economic models that were not factored into the MYTO model. There is supposed to be a room for flexibility during the review of the MYTO, but the sudden changes in the forex policy puts a lot of pressure on the gas suppliers and by extension the Gencos, who have to pay for gas in dollars. This also means the Bulk Trader will be under pressure to pay his obligations to the gas companies.

This is currently a big issue the government has to resolve and NIAF has made some recommendations to government around the model itself and the methodology on how to make it more flexible and responsive to very rapid changes in prices that were not initially factored in.

Bear in mind that the MYTO model factors in a six-month period for minor reviews. The challenge, here, is that, if there are problems that occur at the beginning of the last minor review, it affects the pricing and leads to further shortfalls. Starting every review with such drastic changes in the variables means an increase in tariff and this is what the average citizens do not want to hear, but these are the realities the economic situation presents to the sector.